For details on the results of the study, see OECD (2004), Private Health Insurance in OECD Countries, Paris.

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1 APPENDIX D OVERSEAS EXPERIENCE IN PRIVATE HEALTH INSURANCE Introduction D.1 The healthcare systems in most economies around the world and the roles of private health insurance (PHI) therein are the result of decades of evolution. They reflect the combined influence of unique historical background, social political values, cultural factors, financial resource constraint, among other factors. D.2 Depending on the unique situation in different places, the policy attitudes towards the role of PHI in healthcare systems vary. Some governments look to PHI as an important player to increase system capacity and achieve other health policy goals, while some others do not consider it as an important component. The policy attitude determines how a government defines the role of PHI and the efforts it devote in promoting that role. D.3 Because of the uniqueness underlying the policy towards PHI in different economies, it is impossible to transplant a system that works in one place to another place and expects it to work just as effectively. However, there are certain experiences and lessons that may be useful for design of an incentivized PHI scheme, both in terms of features that may be adapted and incorporated and arrangements that should be avoided. The experiences are mainly drawn from four economies where PHI plays an active role in healthcare financing, including the Netherlands, Switzerland, the United States and Australia. General Experience D.4 It is fundamental to define the role of PHI before deciding how to promote that role. In some places such as the United States and the Netherlands, it is the primary source of health coverage for at least part of the population; in others such as Australia and France, it supplements the public system either by offering a choice of duplicative coverage or filling the gaps not covered by the public system. D.5 Depending on the defined role of PHI, governments then set the desired objectives of enhancing PHI coverage. In places where PHI is intended to play a prominent role, it may be expected to inject new resources into the system or make the channels of healthcare funding to service delivery more efficient. In places where PHI plays a supplementary role, it may be expected to enhance consumer choice and healthcare protection. D.6 However, there is a consensus that PHI presents not only opportunities but also risks for the attainment of health system performance goals. According to a study by Organization for Economic Cooperation and Development in the early 2000s ( OECD study ) 1, a major risk stems from typical information asymmetry problem of insurance market that gives rise to moral hazard induced excessive utilization and hence adds to total healthcare expenditure. There is also an equity challenge as PHI creates disparity in access to care between those with and those without PHI cover. 1 For details on the results of the study, see OECD (2004), Private Health Insurance in OECD Countries, Paris. Page 96

2 D.7 The OECD study identifies that a variety of government interventions through regulatory and fiscal instruments can help address the cost control and equity challenges presented by PHI to the healthcare system. Though it refrains from generalizing a set of hard and fast rules, which are probably impossible due to diverse situations in different economies, the study highlights certain areas for government to play an active role, including regulation of the PHI role, access and benefit related standards for PHI insurers, disclosure requirements, fiscal incentives directed to PHI markets, and broader policies towards private healthcare providers. However, the study is inconclusive regarding how best to strike a balance between the sometimes competing goals of ensuring equity, promoting flexibility, and preserving efficiency incentives within the PHI markets. Scope of Cover D.8 The scope of PHI cover is much related to its role in healthcare financing. In the Netherlands and Switzerland where PHI take up is mandatory and provides the main source of healthcare financing, it covers both inpatient and outpatient care. Yet in Australia and Singapore where the financing role of PHI is supplementary, and where there are no immediate and significant financing concerns with outpatient care, PHI mainly covers inpatient care. Singapore s situation is particularly similar to Hong Kong as outpatient is likewise largely financed out of pocket and PHI provided by employers. D.9 The Dutch Mandatory PHI system allows treatment to be performed abroad with the approval of the insurer, because of shortage of healthcare providers and long waiting lists at hospitals. The idea may be worthwhile to explore in the case of Hong Kong which is also faced with tight supply of private hospital beds and doctors. Cost Sharing D.10 The OECD study recommends that some modest cost sharing arrangements for the insured helps to retain their cost awareness and discourage moral hazard induced utilization. Cost sharing arrangements for PHI usually take the forms of deductibles and co insurance, which co exist in the United States and Singapore to tackle moral hazards and avoid abuse. For deductible in particular, it is also a common tool to reduce the premium in Switzerland, Australia, Singapore and the United States. D.11 It should be noted that in terms of containing moral hazards, coinsurance and deductibles have limited impact of deterring genuine inpatient admissions. Yet they are useful to avoid unnecessary hospital admissions or cases where care can alternatively be provided in an outpatient setting or in a step down facility, which are relatively less costly. Benefit Limits and Out of Pocket Costs D.12 Benefit limits are built into PHI product design in some markets to limit the insurers exposure to the risks of excessive charging by healthcare providers, and as such, patients are required to pay out of pocket (OOP) the expenses above the limits. In Singapore, for example, the benefit limits for surgeries are based on the complexity of the surgery and categorized into seven tiers. In the United Kingdom, the number of tiers can be up to 25. Page 97

3 D.13 There are also circumstances under which the private insurers agree with healthcare providers to make payment directly according to negotiated fee schedules, and as such, benefit limits and OOP payments do not exist in principle. In the Netherlands, Switzerland and the United States, there is no benefit limit and hence no OOP costs for the insured except the cost sharing built into the PHI product. The so called balance billing is generally prohibited. This arrangement is beneficial to patients by reducing budget uncertainty for healthcare. However, there are some practical difficulties in disallowing healthcare charges from exceeding the schedule fees, particularly when the supply of healthcare services is tight. In Australia, the insurers have since the year 2000 introduced a Gap Cover Scheme by which healthcare providers can charge in excess of the schedule fees, but are obliged to obtain the patients informed financial consent before delivering the treatment. Provider Reimbursement D.14 A variety of payment mechanisms to reimburse healthcare charges is observed in some developed economies. For inpatient care in particular, episodic type payments system based on diagnosis related grouping (DRG) is common in such economies as the United States, Australia and the Netherlands. In Australia, there are also some hospital admission the reimbursement of which are based on per diems that are differentiated by type of service and level of complexity. D.15 Overseas experiences reveal that DRG or episodic type payment system can serve as a form of packaged pricing that facilitates market transparency and benchmarking of performance and charges across different hospitals. To the patients, this payment system also provides better certainty in the total amount of insurance benefit for a particular treatment episode, and enables them to predict whether OOP is applicable and the amount more accurately. D.16 In respect of provider payment mechanism, there are some general lessons from overseas experiences that are worth of note. First, if the provider payment mechanism relies on coding, it is open to abuse as some providers have been known to upcode the actual service provide to receive a higher payment. Second, updating of coding rules consistent with changes in environment is critical, since the provider payment mechanism can become outdated quickly with changes in care patterns and introduction of new services, etc. Third, change in provider payment mechanism may provide opportunities for providers to raise charges by taking advantage of changes and lack of continuity and direct comparability between old and new mechanisms. Fourth, to the extent that the payment mechanism leads to lower income to providers from insured patients, the providers may react by providing more services to make up for lower income per services and shifting costs to uninsured patients. There is also a chance that some doctors quit the local market and look for better paying job opportunities abroad if the payment mechanisms are used as a form of price control. Premium Rating, Underwriting and Anti Selection D.17 Anti selection is a systemic risk to PHI that is commonly tackled by insurers through medical underwriting and risk based premium setting. Yet in the mandatory PHI systems of the Netherlands and Switzerland, anti selection is not an issue as all people have to enrol for PHI cover. Insurers need not do any medical underwriting, and the government can dictate the premium rate structure by having community rated premium i.e. flat premium of a given insurance plan for all insured regardless of health risk factors such as age and health history. The Page 98

4 strong sense of solidarity in these economies are conceived to make the cross subsidy implication of community rated premium acceptable to the society. D.18 Yet in a voluntary setting, community rated premium of a government scheme aggravates anti selection as the young and healthy population who pay more premium than risk based level may switch to the unregulated market segment or choose to be uninsured. As a result, the Scheme participants would mainly come from older and less healthy population, thereby undermining the risk pooling function and even causing the Scheme to fail. In Australia, community rating of premium is workable because the government heavily regulates the PHI market by prohibiting risk rating of premium for PHI products. Moreover, insurers are not allowed to medically underwrite and must accept all enrolees with or without pre existing conditions, subject to one year waiting period to counter potential anti selection. Yet anti selection still prevails, resulting in lack of young lives for the insurance pool. In order to encourage the young to enrol, the government has since 2000 introduced the Lifetime Health Cover by which take out PHI after age 30 have to pay an additional 2% of the community rated premium for each year after the age of 30, up to a ceiling of 70%. D.19 In the United States, the PHI market is fragmented while enrolment is voluntary. Individuals can buy PHI from different states and may even relocate to a different state to seek more affordable PHI. This makes anti selection difficult to tackle in some states although they strive to restrict risk rating to provide insurance access to higher risk individuals. The situation in Hong Kong should be somewhat similar as the proposed HPS, if implemented, would not be the sole market segment but would compete with existing PHI products and even products sold in the neighbouring economies. The premium rating and approach to risk classification between the HPS and the existing market would need to be consistent to avoid significant anti selection and price arbitrage. Risk Selection, Risk Equalization and High Risk Pools D.20 In community rated plans such as those in the Netherlands and Australia, some form of risk adjustment or risk equalization mechanism is adopted to discourage insurers from selecting risk and targeting at the relatively young and healthy members. The mechanisms in these two economies are operated by the government and supported by the insurance industry. The adjustment process involves a pool of fund financed by insurers and redistributing premium across insurers so that those with relatively unhealthy portfolio receive more premium, and vice versa. However, risk adjustment is not perfect and insurers still try to select risk through marketing and different product design for different target market segments. D.21 Due to imperfection of risk adjustment mechanism, high risk pools or reinsurance pools are adopted in the Netherlands, the United States and Australia to further equalize the risks between insurance companies. This is done by sharing the cost of large claims or the cost of high cost individuals across the different insurers. Cost Containment D.22 In the OECD study, review of experiences of the OECD countries reflects an overall limited contribution of PHI to total or public cost containment efforts. PHI was found not to have shifted significant cost from the public to the private sector. Some cost shifting occurs in Page 99

5 systems with duplicate PHI markets, although this impact is limited because insured persons often continue to utilize the public system for the most expensive services. It also has had less impact in systems with small PHI markets and has been offset by public subsidies to PHI in others. In most countries with PHI playing a prominent role, PHI has resulted in higher public and total health cost as a result of higher medical prices, increased utilization, or both. Yet the study opines that the desirability or acceptability of cost increases depends upon what benefits result from the higher health care expenditure. D.23 In fact, the inherent nature of the PHI business tends to increase overall healthcare cost if there are inadequate measures, policy measures or market practices, to combat moral hazards and keep the market competitive. In the United States and Switzerland, some insurers have adopted managed care initiatives to control cost and improving quality of care. Yet the effectiveness is mixed. Administration cost is an underlying factor. Initiatives like prior authorization (i.e. requiring the permission of the insurer before hospital admission) had a material impact initially in the United States, but later generated more cost than savings because practice patterns later changed favourably while the cost of administration remained. Some initiatives were also seen to be interfering with the clinical decision making of the doctors and ultimately resulted in political backlash, thus diminishing the effectiveness of some managed care inititatives. There is an opinion that instead of micro management, cost containment initiatives can focus on the bigger picture and should be less antagonistic. Creation of more individual responsibility for healthcare costs, and greater transparency and dissemination of information for consumers to make informed choices are more important. Both of these elements have been part of the strategic thinking of Singapore for many years. Transparency, Benchmarking and Competition D.24 Transparency and benchmarking of private healthcare providers in terms of performance, price and other information of interest to patients are pursued in several economies like the United States and the Netherlands, with a view to facilitating consumer choice and spurring efforts improve healthcare quality and outcomes. D.25 The United States has a large repository of medical encounter data that derives benchmarks for insurers to compare different healthcare providers. These benchmarks are now being integrated into consumer driven health plan designs by which an individual takes more financial responsibility for personal healthcare costs, but at the same time is provided with more information on the range of hospitals and doctors available. In the Netherlands, the government has been pushing hard for transparency and benchmarking. To support health organizations in achieving the goal of making healthcare transparent and developing a set of publicly availably information on quality of care, the government has set up the programme called Zichtbare Zorg (Transparent Healthcare) which develops quality indicators for the whole healthcare market, from general practitioner care to hospital care and pharmaceutical care. D.26 Regarding performance of private health insurers, Australia and the Netherlands have set up information platforms by which consumers can readily compare PHI products offered by different insurers in the market, with a view to enhancing consumer choice and creating competition pressure for insurers. Such efforts are echoed by the OECD study which recommends fostering readily understood comparative information and product disclosure requirements. The study reveals that disclosure requirements can work together with benefit standards to promote and reinforce consumers understanding of their PHI products and coverage Page 100

6 options. It also states that some limits on benefit packages, or their standardization, may be appropriate especially for products targeting the elderly and chronically ill people, although benefit standardization can reduce insurers ability to innovate and tailor products to individual demands. Appeals Mechanism D.27 There are specialized appeals mechanisms in many economies like the United States, Australia, Switzerland and the Netherlands. They are independent organizations charged with dealing with complaints and conflicts among insurers, providers and insured persons. In some cases, their roles extend to determining whether a procedure, medicine, or treatment should be covered by PHI. Regulation D.28 The basic scope of regulation related to PHI in different places is mostly similar, usually covering prudential regulation of insurers to ensure that they have sufficient funds to meet their obligations to the insured, product regulation to ensure that the products sold fulfil policy objectives on PHI, and in some cases premium regulation to safeguard consumer interest. Premium regulation is relatively more controversial due to concern over the adverse impact of price control on market efficiency and solvency position of insurers. In Australia, for example, there is considerable controversy in the society over the required approval on annual premium adjustment from the government. D.29 The regulatory structure differs from one place to another. In the Netherlands and Switzerland, the structure is relatively complicated with multiple bodies involved in different aspects of regulation. Though the Dutch government has streamlined the structure in recent years, there continue to be complaints of excessive bureaucracy and excessive workload on the part of insurers to comply with government regulations. In Australia, most of the PHI regulatory burden falls under one body i.e. the Private Health Insurance Administration Council (PHIAC). PHIAC has devoted concerted efforts in recent years to streamline the regulatory framework and has adopted an outcome based regulatory approach since The principle is to avoid over regulating and creating unnecessary paper works, and rather to focus on key performance indicators, such as premium rate increase and management expense efficiency, and require additional reporting if an insurers performance falls below the requisite standard. Encouraging PHI Ownership D.30 In the mandatory PHI systems of the Netherlands and Switzerland, there is no issue of encouraging PHI ownership as PHI coverage is by definition universal. Yet premium subsidy is provided by the government which is meant to relieve the financial burden especially for the poorer people. In some economies without active policy stance towards PHI, like Canada and the United Kingdom, tax credit to offset expenses on PHI premium exists but appears to serve more as an integral part of general fiscal concession to families. D.31 In Australia, the government has introduced a non means tested premium rebate of 30% in December 1998 to boost PHI take up (with higher rebate up to 40% for elderly since April 2005). Page 101

7 Yet the impact on PHI is insignificant, with population coverage of PHI edging up from 30% in December 1998 to 31% in September Insufficient response from the young population, as manifested by the PHI coverage of people aged at 27% in March 2000, was a major contributory factor. Yet this ratio soared to 46% in September 2000, three months after the Australian government introduced the Lifetime Health Cover (LHC) with premium loading for late enrolment above the age of 30. Overall population coverage of PHI went up to 45% in June While the combination of incentives and penalties (carrot and stick approach) played a part, it is opined that the final push came from a massive joint marketing campaign by the government and the insurance industry with the theme Run for Cover, coupled with a time limited period when those who over the age of 30 could join without the LHC penalty. D.32 In Singapore, the government uses what may be described as a step wise approach. The government implemented the Medishield PHI scheme which is a high deductible, low premium PHI package for individuals, in the early 1990s. Central Provident Fund members are automatically enrolled unless they opt out, and only a small proportion of members opted out. After that, top up covers were introduced on an opt in basis, and eventually insurance companies were invited to sell Integrated Medishield (comprising basic Medishield cover with wraparound additional cover following regulated specifications) and additional top up Medishield products (designed by private insurers). In recent years, while continuously propagating the need for individual responsibility for healthcare costs, the Singapore government has not only been expanding the benefit coverage, but also the scope of population covered to include newborns, dependents and self employed individuals. Currently, Medishield covers over 80% of Singaporean citizens and permanent residents. Page 102